After a good start to the year the upswing has temporarily stalled. In the second quarter the German economy contracted slightly and business expectations have clouded over substantially compared with early in the year. A key factor behind this is the uncertain geopolitical backdrop, first and foremost the Russia/Ukraine conflict. In addition, the economic recovery in the eurozone is far from smooth – Italy and France remain a cause for concern. And with the economy in a number of emerging markets, such as Brazil and Turkey for instance, also no longer purring, the global economic backdrop is currently problematic.

Allianz SE
Munich, Oct 07, 2014

“However, these negative factors for the German economy go hand in hand with a whole string of positive factors. The jobs boom is continuing. Rising employment is generating income. In conjunction with very low inflation and a steeper rise in effective wages, purchasing power gains are speeding up,”said Michael Heise, Chief Economist at Allianz. Consumer demand is likely to provide more of a boost. Construction is still enjoying an upswing even if output dropped temporarily in the second quarter. High immigration flows and extremely favorable financing conditions continue to buoy the outlook in the residential construction sector. The fall in the euro, which is likely to continue for a while yet, boosts export prospects, even if growth in world trade remains moderate. All told, Allianz sees only weak gross domestic product growth in the second half of this year. Average growth in 2014 looks set to come in at 1.5 percent.

“The outlook for the German economy in 2015 is also clouded by uncertainty. But we believe the upward forces will maintain the upper hand,” said Heise. Exports are likely to provide more of a boost than in 2014. Strong rises in labor and transfer incomes will stimulate consumer demand, although jobs growth will slow, not least due to the introduction of the minimum wage. The sharper rise in costs and pickup in import prices will push inflation back up again. Given somewhat higher capacity utilization and healthy earnings, investment activity is likely to pick up moderately despite ongoing uncertainties. All told, Allianz expects economic growth of 1.4 percent in 2015.

Despite the trade sanctions against Russia German exports will probably pick up slightly in the last few months of this year and substantially in the course of 2015. The global economy is more robust than might appear the case given the political and military crises. The economy in a number of ailing emerging markets is likely to gradually get back into stride. Demand from the eurozone will probably pick up progressively as former crisis countries get back on their feet. The improved price competitiveness of the German exports sector will remain intact in 2015 as well, even if domestic cost pressures intensify somewhat. In real terms Allianz figures show German exports rising by 4.1 percent in 2015 after 3.3 percent in 2014 and 1.6 percent in 2013.

Although private consumption has been increasing steadily for years, in real terms, however, growth has been at only a snail’s pace. After real increases of 0.7 percent in 2012 and 0.8 percent in 2013, growth of 1.1 percent this year is on the cards this year. The rise in contractual wages stood at a good three percent of late. Next year the introduction of the minimum wage will push up effective earnings per employee by an estimated ¾ of a percentage point. It is still likely that the minimum wage will put an appreciable damper on jobs growth, but overall labor income is likely to rise by 4.0 percent in 2015.

The inclusion of R&D outlays in investment activity is the most significant of the recent conceptual changes in the national accounts. This pushed up the share of investment in GDP in 2013 from 17.2 percent to 19.7 percent. However, this does not alter the weak performance of fixed capital formation, which fell by 0.7 percent in both 2012 and 2013. This year at least looks set to see a recovery. Allianz is penciling in a real increase in equipment investment of 4.7 percent in 2014, in construction investment of 3.8 percent and in other investment of 1.9 percent.

Despite very favorable financing conditions and relatively healthy corporate earnings the investment outlook is highly uncertain. The reason lies in the geopolitical tensions, and above all the Russia/Ukraine conflict, which spawn uncertainty and thus curb the propensity to invest. Equipment investment, which slipped marginally in the second quarter following two strong quarters, reacts very sensitively to such disturbances. “Assuming that the geopolitical conflicts do not escalate and actually ease somewhat in the course of next year the prospects are good that equipment investment will return to the path to recovery in late 2014 and in 2015. However, the recent pickup does not fundamentally change the underlying downward trend in the investment ratio in Germany over the longer term. At 9.9 percent the share of fixed capital formation in GDP was almost as low as the 9.7 percent nadir seen in the economic crisis 2009,” Heise explained.

The German labor market has remained in good shape despite the dip in the economy in the second quarter. So far this year the number of people in work has risen by around 280,000 in seasonally adjusted terms while the jobless total has fallen by around 25,000. The fact that the number of people in work is rising much more sharply than the jobless total is falling is largely attributable to the high immigration of workers into Germany and rising labor force participation among older people and women. Encouragingly, the year-on-year increase in the number of jobs liable to social insurance of 1.8 percent most recently remains well above the increase in overall employment (0.8 percent). On average employment will probably rise by around 370,000 in 2014 and unemployment fall by around 40,000.

Economic growth next year is unlikely to be as labor-intensive as this year. With GDP growth pretty much in line with the 2014 figure, Allianz expects the number of people in work to rise by only 100,000 over the course of the year and on average by just over 200,000. The introduction of the minimum wage will curb jobs growth substantially. The number of people in the low-wage sector is likely to drop appreciably. All told, the number of people in work at the end of 2015 is likely to be some 100,000 lower than it would have been had the minimum wage not been introduced. Allianz expects unemployment to broadly stagnate over the course of 2015. On average in 2015 an estimated 2.90m people will be out of work after 2.91m this year.